Tuesday, 7 July 2015

Cyclists and Juggernauts

The rule of 'fade the mood’ has been playing out wonderfully over the past couple of weeks and if the fade of bad news on Monday morning wasn’t impressive enough, fading the Varousectomy induced rally was stunning. To cap it all, the firework of volatility gave us a third thunderous blast as markets ripped back higher (from a position that looked pretty horrific at one point) to the oohs and aahs of the watching crowds and the WTFs of the participating traders. 

Playing the rule of fade we should now naturally be looking for everything to fall over again tomorrow or Thursday, but before we do let’s just add a few things together. 

First the anatomy of today's dump. Though things started quietly, there were early signs of bond switches that probably wouldn’t be picked up on indices but were interesting, High price bonds of high coupon were being sold and low price bonds with low coupons of same credit and duration were being bought. Why? Well one would imagine that if you were to think your bond were ever to take a haircut and be worth, say 50c in the Euro, then you’d rather have paid 90c for it rather than 120c. 

Meanwhile oil continued to slide. Oil stocks have suddenly accelerated lower and my normal bellwether strange ones are now only just off the lows they reached when WTI was at $44, indicating something deeper going on.  US equity futures had pushed higher overnight and were looking perky most of European morning, looking as though the US was bored of Greece and happy to start the buyback without Europe, but when they opened everything melted. 

This handily married up with news that Greece had not brought their homework to the EU summit, instead saying it was in the post. This appeared to catalyse a dump that many had expected on Monday only to have been squeezed out of. The dump itself was a good old fashioned risk off dump across everything. Even Gilts rallied 2 big points. The anatomy of the dump was looking great until 4.30pm London close when everything did another volte-face. 

As I write, most equity indices are back to their starting points on the day and other stress indicators have bounced similarly well. I would normally read the price action as a clear indication that a bottom is in and the only way is up, citing candlestick hammers, mood blow offs in 'risk everything', margin call clear outs and the rest of the momentum indicators I watch. But in light of the fade rule of the past few days I can’t believe it. 

Though Greek news might be boring to the US players, it is not over by a long chalk and I must insist we all refer back to rule 1 of the EUroad :- The French, Spanish, EC, Greeks etc are like cyclists, being more harm to themselves than other road users, whilst Germany, ECB and IMF are 18 wheeler juggernauts about to turn left ('right' for my EU/US readers) at the lights without checking their mirrors, to be ignored at your peril. Especially if you are a cyclist. 

France, even if it is being backed by the US, can say what it likes but an ESM decision has to be unanimous. Germany and the Northern brethren are key and though the US has considerable clout over Germany, particularly with regard to defence in a time of Russian sabre rattling, Merkel has to be aware of her position too with regard to the domestic voters

I have just read a fascinating piece by Abrose Evans-Pritchard. I normally ignore his Eurodoom pieces because of their monotonous nature but this one is fascinating as it is stating, as fact, details about Syriza's dire position. Detail that would be just too divisive to make up. It claims that Syriza have got themsleves into a jam not having wanted to win the referendum but are now forced to go to Brussels and only return with a debt reduction deal or face uprisings against them at home. Which is much the position Merkel is in as she too cannot now be seen to back down. We have two leaders who have both been pushed into the gladiatorial arena with their baying supporters demanding a death. Whether it be at the hands of the other or at the hands of the crowd should they return unsuccessful, one of them has to be seen to go down and the German has the better armour and a longer spear. So whereas before the referendum Tsipras was damned if he did and damned if he didn't, he's now dead either way.

The EU has a track record of anaesthetising problems to sleep with a cocktail of filibuster and complexity of solution and though we seem to have another final deadline, Sunday, I am pretty sure that if someone were to check the patients ECG it would already be seen to be flatlining. 

So wherefore markets? This melt and bounce can be partly blamed on huge option gamma in S+Ps around the 2060 area whipping up short term moves but also on the latest about turn on opinion with respect to a deal. But, please see rule 1 above of the EUroad, the noise is once again coming from the French and EU Politicians with not a squeak from the North as far as compromise goes. So until we hear  something consiliatory from the Juggernauts I am still looking for another fade, but this time an even bigger one. 

Watch out below

Footnote - It looks as though a late bid has come into the auction room from the red corner. Russia saying no problem if Greece want to borrow from BRIC bank http://tass.ru/en/world/806684

Which reminds me of this post from January which now stands more of a chance of playing out as a reality, http://polemics-pains.blogspot.co.uk/2015/01/greece-turns-singaporean-after.html. Greece remarries Europe, steals the joint bank account and runs off with a new partner


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